VAT efficiency in the EU

Tamar Kobalava

Master's thesis

Abstract:

This thesis focuses on assessing the efficiency of the Value Added Tax (VAT) system in the European Union (EU), a crucial revenue source for many countries. The research uses the C-efficiency ratio, decomposed into Policy gap and Compliance gap, to identify trends and differences in VAT Efficiency indicators between higher developed and lower developed economies in the EU. Surprisingly, lower developed economies exhibit higher C-efficiency rates. Higher developed economies show almost three times higher Policy gaps than Compliance gaps, indicating potential revenue loss. On the other hand, lower developed economies display higher Compliance gaps, suggesting tax evasion and poor administration, although with decreasing trends for the past couple of years due to the successful implementation of VAT listings. The C-efficiency was decreased by the financial crisis and the Covid-19 pandemic in both groups. During the financial crisis, the Compliance gap increased in both groups. In contrast, the Covid-19 pandemic affected the VAT efficiency of both groups by increasing the Policy gap due to temporarily reduced VAT rates. On the other hand, Compliance gaps showed unusual phenomena during the Covid-19 pandemic, such as a decrease during the economic shock, due to temporary changes in tax rates, increased electronic transactions, and changes in financial consumption structure. The study concludes that higher developed economies are mostly more resilient to economic shocks but generally face challenges related to policy gaps. In contrast, lower developed economies struggle with Compliance gaps, although with decreasing tendencies during the last years.

Abstract:

This thesis focuses on assessing the efficiency of the Value Added Tax (VAT) system in the European Union (EU), a crucial revenue source for many countries. The research uses the C-efficiency ratio, decomposed into Policy gap and Compliance gap, to identify trends and differences in VAT Efficiency indicators between higher developed and lower developed economies in the EU. Surprisingly, lower developed economies exhibit higher C-efficiency rates. Higher developed economies show almost three times higher Policy gaps than Compliance gaps, indicating potential revenue loss. On the other hand, lower developed economies display higher Compliance gaps, suggesting tax evasion and poor administration, although with decreasing trends for the past couple of years due to the successful implementation of VAT listings. The C-efficiency was decreased by the financial crisis and the Covid-19 pandemic in both groups. During the financial crisis, the Compliance gap increased in both groups. In contrast, the Covid-19 pandemic affected the VAT efficiency of both groups by increasing the Policy gap due to temporarily reduced VAT rates. On the other hand, Compliance gaps showed unusual phenomena during the Covid-19 pandemic, such as a decrease during the economic shock, due to temporary changes in tax rates, increased electronic transactions, and changes in financial consumption structure. The study concludes that higher developed economies are mostly more resilient to economic shocks but generally face challenges related to policy gaps. In contrast, lower developed economies struggle with Compliance gaps, although with decreasing tendencies during the last years.

Keywords

VAT, C-efficiency, Policy gap, Financial crisis, Covid-19, Compliance gap, Higher developed economies, Lower developed economies, VAT system

Keywords

VAT system, VAT, C-efficiency, Policy gap, Lower developed economies, Financial crisis, Covid-19, Compliance gap, Higher developed economies

Language used: English

Date on which the thesis was submitted / produced: 21. 5. 2023

Thesis defence

• Date of defence: 16. 6. 2023
• Supervisor: Hana Zídková
• Reader: Stanislav Klazar

Vysoká škola ekonomická v Praze

Master programme:
Finance and Accounting